Sweet victory
The company which runs the Nectar points scheme accounts for output VAT on the money it receives from shops which award points to customers, but was told by HMRC that it couldn’t claim input VAT on the cost of providing scheme rewards – the taxman said that it didn’t ‘receive the supply’ of goods and services when collectors redeemed points, so it couldn’t deduct any VAT in respect of the cost. The European Court of Justice appeared to support HMRC’s view.
The Supreme Court has now decided that the tax has to be deductible – the ‘economic reality’ was that it was a VATable cost that was directly related to the earlier VATable sale of points, and it would be unfair to deny a deduction.
The facts are unusual, but there are two important principles. First, promotional schemes often create a VAT headache, because there are special rules for ‘business gifts’ and ‘free supplies’. Second, if you pay for something to be supplied to someone else, you may not be able to claim the VAT on the cost – HMRC may use the same argument as in the Nectar case, and they might win.
If you are not sure whether or how you can recover VAT on promotional costs, we can advise you.